Express Contractual Clauses and Pendente Lite Interest under the 1940 Act: A Refined Bar Standard

Introduction

The Supreme Court of India’s decision in M/S FERRO CONCRETE CONSTRUCTION (INDIA) PVT. LTD. v. THE STATE OF RAJASTHAN (2025 INSC 429) clarifies the scope of an arbitrator’s power to award pendente lite interest under the Arbitration Act, 1940 (“1940 Act”), particularly in the presence of contractual clauses allegedly barring the payment of interest.

In this case, the Appellant—a construction contractor—challenged the decision of the District Judge and the subsequent High Court affirmation, both of which set aside the arbitrator’s award of interest. The principal question was whether a broadly worded contractual bar on interest would preclude an arbitrator from awarding pendente lite interest.

This commentary delves into the case background, the Supreme Court’s reasoning, the precedents cited, and the ultimate new clarification on how contractual bars must be evaluated when determining an arbitrator’s power to award interest under the 1940 Act.

Summary of the Judgment

The Supreme Court allowed the appeal, holding that the contractual clause (Clause 22) in question did not constitute a sufficiently “clear and express” bar preventing the arbitrator from awarding pendente lite interest. The Court distinguished between a simple clause stating “no interest shall be payable” and an explicit clause that specifically excludes the arbitrator's jurisdiction to grant pendente lite interest. Given that the clause in this contract merely prevented the contractor from claiming interest on any arrears or balances due, but did not expressly mention the arbitrator’s power, the Court concluded that the award of pendente lite interest remained valid under the 1940 Act’s broader interpretative approach.

However, owing to the time elapsed and partial interest already paid, the Supreme Court reduced the interest rate from 15% to 9% pendente lite.

Analysis

Precedents Cited

• Reliance Cellulose Products Ltd. v. ONGC Ltd.: The Court summarized the distinction between the 1940 Act and the Arbitration and Conciliation Act, 1996 (“1996 Act”) in awarding interest. Under the 1940 Act, a strict construction of a “no-interest” clause requires the clause to be “clear and express” in ousting the arbitrator’s power. Reliance Cellulose also reiterated the need for clarity and explicitness when interpreting contractual bars.
• Secretary, Irrigation Department, Government of Orissa v. G.C. Roy: A key Constitution Bench decision recognizing that, under the 1940 Act, arbitrators have the power to grant pendente lite interest unless a contract unequivocally blocks that power.
• Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj: Another Constitution Bench ruling, confirming that under the 1940 Act, an arbitrator may grant pre-reference, pendente lite, and post-award interest absent a specific contractual bar.
• Union Of India v. Ambica Construction (First Ambica case): A 3-judge bench clarified that Engineers-De-Space-Age should not be read to override an explicit bar on the award of pendente lite interest. The emphasis lay on examining whether the contract specifically excluded “arbitrator’s power” or simply stated that “no interest” would be borne by a party.

Legal Reasoning

The Court’s reasoning rests on the distinction between the 1940 Act and the 1996 Act:

• Under the 1940 Act: The arbitrator’s power to award interest is recognized through case law, but a clear and express “no-interest” clause aimed at pendente lite interest can bar such an award. The focus is on whether the contract explicitly excludes disputes before arbitrators from interest claims.
• Under the 1996 Act: Section 31(7) specifically endorses party autonomy, providing that once a contract says “no interest,” that typically includes pendente lite interest absent contrary wording. Hence, the 1996 Act’s built-in statutory scheme for interest invites a different interpretative approach.

After confirming this legal framework, the Supreme Court examined Clause 22 of the agreement. Clause 22 barred the contractor from claiming interest on payments or arrears “at any time” but lacked any direct reference to disputes or claims “in arbitration.” Because no explicit mention was made to “arbitration” or “pendente lite” interest, the Court concluded the clause was not a sufficient bar under the 1940 Act’s stricter standard for such exclusions.

In reaching this conclusion, the Court adhered to the principle that if the framers of the contract intended to strip the arbitrator of the authority to award pendente lite interest, they would have had to include unambiguous wording expressly referring to the arbitrator’s power. As they did not, the Supreme Court held that the arbitrator’s power endured.

Impact

• Guiding Contractors and Government Entities: Government departments, public undertakings, and private contractors must pay closer attention when drafting interest-bar clauses in their contracts. General “no-interest” clauses risk being deemed insufficient under the 1940 Act unless explicitly stating a bar on pendente lite interest within an arbitration proceeding.
• Future Contracts under the 1996 Act: Although this judgment operates under the 1940 Act, it reinforces a well-established distinction that any “no-interest” clause under the 1996 Act will likely be honored if it is broadly stated. Parties drafting contracts for disputes under the 1996 Act must draft such clauses carefully to avoid future litigation.
• Consistency and Uniformity: The decision confirms that the Supreme Court’s stance on awarding pendente lite interest remains consistent with earlier case law. It provides further clarity on how courts will read such clauses and thus fosters uniformity in interpreting arbitration agreements.

Complex Concepts Simplified

Pendente Lite Interest: Interest awarded for the period during which arbitration proceedings (or any legal proceedings) are ongoing, falling between the date of reference of the dispute and the date of the arbitral award (or judgment).

Bar to Arbitrator’s Power: A contractual provision can restrict the arbitrator’s authority if it unambiguously states that the arbitrator has no power to award a certain relief. Under the 1940 Act, the courts scrutinize the language strictly, requiring explicit mention of “arbitrators” or “pendente lite” interest, or a similarly direct exclusion.

1940 Act vs. 1996 Act Approach: While both statutes allow arbitrators to grant interest, the 1996 Act codifies this in Section 31(7). It also explicitly respects “party autonomy,” meaning that if the contract says no interest at all, that will typically control. Under the 1940 Act, longstanding judicial interpretations require clauses to be very explicit before they can limit interest.

Conclusion

The Court’s ruling in M/S FERRO CONCRETE CONSTRUCTION (INDIA) PVT. LTD. v. THE STATE OF RAJASTHAN underscores the need for contract drafters to carefully articulate the scope of any interest bar if their intention is to prohibit pendente lite interest. Merely stating that “no interest shall be payable” on amounts due is not sufficient under the 1940 Act to oust the arbitrator’s authority.

As a result, this Judgment affirms that the award of pendente lite interest will stand unless the contract explicitly and unequivocally withdraws that power from the arbitrator. It clarifies the scope of judicial deference to the parties’ agreed terms, providing a roadmap for both drafting clear bar clauses and for challenging or defending pendente lite interest claims in future arbitrations.